CASE : BLAKE

ELECTRONICS
Decision Analysis
Case summary
 To look at the possibility of manufacturing
electronic components for home use.
 Efficient production of the system needed.
 Low manufacturing cost and increasing sales.
In- house research team report:

 $500,000 manufacturing cost

 $2 million increase in sales
 60 % chance of success
Additional Market Research:

1. MAI
• $100,000 Survey Charges
• Survey Results

OUTCOME FAVORABLE UNFAVORABL TOTAL

E

Successful 35 20 55
venture

Unsuccessful 15 30 45
venture
Additional Market Research:

2. Iverstine and Kinard

• $300,000 Survey Charges
• 90% chances of getting favorable survey result, given
a successful venture
• 80% chances of getting unfavorable survey result,
given a unsuccessful venture
SOLUTION
P(V)= probability of successful venture
P(V’)= probability of unsuccessful venture
P(F)= probability of favorable outcome of survey
P(F’)= probability of unfavorable outcome of survey
SOLUTION
Prior Probability:
P(V)= 0.6 P(V’)= 0.4
Conditional Probability:
1. MAI: P(VIF)= 0.7 P(V’IF’)= 0.6
P(V’IF)= 0.3 P(VIF’)= 0.4
2. I&K: P(FIV)= 0.9 P(F’IV’)= 0.8
P(F’IV)=0.1 P(FIV’)= 0.2
SOLUTION
a) MAI’s proposal directly gives Steve the
conditional probabilities he needs (e.g., probability
of a successful venture given a favorable survey).
Although the information from Iverstine and
Kinard (I&K) is different, we can easily use Bayes’
theorem on I&K information to compute the
required probabilities. As such, Steve does not need
any additional information from I&K.
SOLUTION

b) Posterior Probability:
As only those for I&K need to be calculated
POSTERIOR CONDITIONAL PRIOR JOINT

P(V I F) P(F I V)= 0.9 P(V)= 0.6 P(F ∩V)= 0.54

P(V I F’) P(F’ I V)= 0.1 P(V)= 0.6 P(F’ ∩ V)= 0.06

P(V’ I F’) P(F’ I V’)= 0.8 P(V’)= 0.4 P(F’ ∩ V’)= 0.32

P(V’ I F) P(F I V’)= 0.2 P(V’)= 0.4 P(F ∩ V’)= 0.08

P(F)= 0.54+ 0.08= 0.62; P(F’)= 0.06+0.32=0.38

P(VIF)= 0.54/0.62=0.87 P(V’IF’)= 0.32/0.38=0.84
P(V’IF)= 0.08/0.62=0.13 P(VIF’)= 0.06/0.38=0.16
RECOMMENDATION

 If Steve decides not to conduct a survey

EMV= $700,000
 If Steve decides to conduct the survey
 overall EMV of hiring MAI= $500,000
 overall EMV of hiring I&K= $468,800

Comparing these alternatives, Steve should not hire

either firm to do the survey. He should simply choose to
introduce the produce right away for an EMV of
$700,000.